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Tax
South Texas College of Law Houston
Yamamoto, Kevin M.

Federal Income Tax Outline

Professor Yamamoto

Summer 2010

Tax- compulsory exaction by a government (federal state or local), exercising its sovereign power to provide revenue for general government

Compulsory exaction – distinguishes from a fine

Provide revenue for general government – contrast to special assessment to pay for street lights, sidewalks, etc.

Types of Tax:

Direct tax – tax demanded from person paying the tax

Indirect tax – tax paid by a person who can shift the burden to someone else – not legally required to pay it

Sources of Tax Law & History

a. Sources of Tax Law

i. The Code — A part of the United States Code (Title 26, Subtitle A, Chapter 1 [income taxes], Sub-chapter A, B, O, or P.

1. Current code 1986 version with revisions

2. First Code in 1939 [before 1939 lapses of occasional income taxes], revised in 1954

ii. Case Law –

1. the judicial branch either:

a. Interprets tax law and regulations or

b. Creates of judicial doctrine and rules

2. Sometimes courts will add additional requirements on top of the code requirements

3. Three Types of Trial courts:

a. Tax Courts – only non-refund tribunal (the t/p does not have to pay the debt before bringing the case); no jury; Article I court

b. U.S. Dist. Court – Article III court; jury available; refund tribunal (the t/p must first pay and then bring suit)

c. Court of Federal Claims – no jury; refund tribunal

d. Appeal – whatever higher court has jurisdiction over the lower court & Supreme Court

iii. Administrative – Congress delegated the power to regulate taxes to the executive branch, and created the I.R.S.

1. Head of the IRS is the Commissioner — currently Douglas Schulman

2. Put out regulations which either:

a. Interpret the code — Congress gives the treasury the

b. Legislate — Congress gives the Treasury the authority to make law in a certain area.

i. Note: the judiciary checks the executive branch by ensuring these are in line with IRC

3. Rulings are also put out by the I.R.S.:

a. Private Letter Rulings – individuals asks IRS to answer certain tax questions

b. Revenue Rulings – answers to more general questions

i. Printed weekly in Internal Revenue Weekly

ii. The Cumulative bulletins are made twice a year

iv. Legislative History: shows the policy behind the statute. Most important are committee reports (reports by Congressional committees that explain what the tax bill is designed to do)

1. In House the committee is the Joint Committee on Taxation

2. In the Senate it is the Financial Committee

b. History of Tax Law

i. Before 1939 income taxes were only occasionally administered by the government — usually only on spirits, beer, or tobacco

ii. The Power to Tax:

1. Congress is given power to tax by the Constitution – “Congress has the power to lay and collect taxes”

2. There are some restrictions:

a. Direct taxes must be equally apportioned to the states

i. Rule of Apportionment – (direct taxes) once Congress has est. a sum to be raised by direct taxes – sum must be divided among the states in proportion to their population [16th Amendment made income tax not subject to rule of app.]

b. All duties must be equal across the United States

c. Constitution only requires geographic conformity

3. 16th Amendment: income taxes are not subject to the rule of apportionment (read narrowly to over-rule cases that said otherwise)

Overview of the Tax Code

a. § 1(a): shows rates of taxation

i. Progressive tax – as taxable income goes up, the rate of taxation increases

1. Rich pay more taxes than the poor — opposite of a regressive tax where the poor pay a greater % of their income v. the rich

ii. Marginal tax – the rate at which the last tax dollar is taxed

iii. Average tax – rate of all tax dollars

iv. Tax liability = BASE (taxable income) x RATE (§1)

1. Taxable income period

a. For individuals à calendar year

b. For businesses à fiscal year

v. Calculating tax rate with table (5/25/2010)

1. Go to the bracket that the individual fits into

2. Add the first number (tax liability added from lower brackets)

3. To the second number, which will be the difference between the first number in the margin and the t/p taxable income; multiple this number by the applicable tax rate

vi. Calculating the average tax rate (5/25/2010)

1. Tax liability/ Taxable income

vii. Remember: only dollars in the top marginal tax rate bracket are taxed at that rate

b. § 63 — taxable income defined

i. Taxable income = Adjusted Gross Income – deductions in this chapter other than standard deductions

ii. (a) STANDARD — applies to:

1. corporations, trusts, estates, (any non-individual) or

2. individual who elects to itemize

iii. (b) ITEMIZED — two requirements to apply:

1. must be an individual

2. who does not itemize

c. § 62 — adjusted gross income

i. AGI = GI – deductions in §62(a)(1-20) [notice: the deductions listed in 1-20 only tell you where to take the deduction, not what is deductable. Before using §62(a)(1-20) have to find the deduction elsewhere in the code.

1. §62(a)(1-20) deductions AKA “Above the Line” deductions

ii. only applies to individuals (NOT corporations, estates, trusts,etc)

d. § 151 — deductions for personal expenses

e. § 6501(a) — statute of limitations

i. SOL starts running at the later of either:

1. Date the return filed by the t/p

2. Date the return was due to be filed (ie April 15)

ii. If you don’t file à the SOL does not run

iii. Statute of limitations is 3 years

f. Tax Ladder

GI

[§62 deductions] (“above the line”)

= Adjusted GI

[Standard or Itemized deductions (§63)]

[Personal Exemptions (§63(b)(2))]

= Taxable Income

* rate

ply

1. §132(a)(1): no additional cost service

2. §132(a)(2): qualified employee discount

3. §132(a)(3): working condition fringe

4. §132(a)(4): de minimis fringe

5. §132(a)(5): qualified transportation fringe

6. §132(a)(6): qualified moving expense reimbursement

7. §132(a)(7): qualified retirement planning services

8. §132(j)(4): athletic facilities

d. NO ADDITIONAL COST SERVICE

i. “Employee” for this section: persons currently employed, retired employees, disabled ex-employees, their spouses & dependant children

ii. Services provided by the employer to the employee

iii. To be excluded must:

1. Service that employee is receiving is offered to customers and is in the same line of business that the employee performs

2. The employer does not incur substantial additional cost in providing the service to the employee [not costing the er anymore than expected — do not keep in mind money that em’e paid for the service]

3. §132(j)(1): non-discriminatory: to receive the service must be non-discriminatory – if provided to highly compensated individuals must also be provided on substantially equal terms to other employees

a. if the service is discriminatory à no employee gets it

iv. Em’r can also for reciprocal agreements with other companies for NAC benefits for em’e — as long as (§132(i)):

1. Same or similar business;

2. There is a written agreement

3. No substantial cost to either em’r

e. QUALIFIED EMPLOYEE DISCOUNT

i. Definition of an employee for this section: persons currently employed, retired employees, disabled ex-employees, their spouses & dependant children

ii. Two requirements:

1. Must be an employee discount -price provided to employee is less than what is being charged to customers

2. Qualified Property/Services – property/services that are offered for sale to customers in the ordinary line of business of the employer for which the employee provides services

a. NOT real property and NOT investment property

iii. Additional Requirements:

1. Non-discriminatory: the discount must be offered in a substantially similar way to highly compensated ee’s and all other ee’s (§132(j)(1))

2. No reciprocal agreements allowed

3. The Code places a ceiling on what the discount can be:

a. For services à cannot exceed 20% of what the product is offered to customers